Stock in Small Banks Swells Despite Market Slump

By Sandy Eckert, Contributing Writers

During the recent market slump, stock prices of small banks generally have surged. Local banks were no exception, but now their lure to buyers may be at the max.

“It’s the eighth inning for small banks now,” said Peter LaBella, financial consultant for FMA advisors in Harrisburg. Small banks are close to their full valuation in this environment, he said. He added that the opportunity for investors isn’t as great as it was a year ago.

Not surprisingly, local small-bank executives disagree.

Mel Pankuch, president and chief executive officer of Blue Ball National Bank in Lancaster County, said his bank's stock has not yet hit its ceiling.

“Our earnings will be exceptional this year. We have new things to announce that will entice stockholders.” Pankuch wouldn’t say what the announcements would be.

The stock price of PennRock Financial Services Corp. of Blue Ball, which owns Blue Ball National Bank, is up by 45 percent so far this year. The stock was trading at $22 a share in January and is now at $29.40 a share, Pankuch said. In July the bank’s shares were at $34, and it paid a 10 percent stock dividend, and the price was adjusted. Shareholders were given one additional share for every 10 share that they owned.

Ephrata National Bank is up by 38 percent so far this year, and Pennsylvania Commerce Bancorp Inc., the holding company for Commerce Bank/Harrisburg, is up by almost 19 percent.

“Small-bank stocks are always solid performers for dividends and some growth,” Pankuch said.

The high-tech market was hot and captured investors’ attention two years ago.

“Local banks were considered old hat and boring,” said George Weaver, financial consultant at Hazlett Burt & Watson in Lancaster City. “Now that the market is down, small banks are safe, rather than boring.”

Bigger banks have been hurt by some of the corporate practices of companies such as Enron Corp., WorldCom Inc. and Adelphia Communications Corp., LaBella said. Because of the bad loans that the bigger banks made to those companies and to some overseas countries such as Argentina, the stocks of the big banks decreased.

“Small banks are like the Rock of Gibraltar. Our deposits are growing even though interest rates are coming down,” said Aaron Groff, president of Ephrata National Bank. The deposit growth comes from people seeing the stock market downturn and buying bank certificates of deposit that are safe, Groff said. That, in turn, increases small banks’ value in the stock market.

Small banks also pay about 1.5 percent interest on their money-market accounts but make their margin off the spread between the interest they charge borrowers - about 6 percent - and the interest they pay depositors - about 1 percent - for savings or bonds, LaBella said.

LaBella said large banks also profit from fee-based businesses, such as the brokerage houses, credit cards and loan origination’s they own. But with the market slump, business is down.

Weaver said that small banks’ market prices would stay steady for a while.

“Yet, if the overall market continues to sell off (at low prices), small banks may begin to look expensive,” Weaver said. “They are not a great place to plow a lot of money into these days. Most of the money has been made.”

Not so, said Nalbandian.

“Commerce Bank is on a branch expansion program. We opened two branches this year and last,” he said. “We’re developing new markets, next in Reading, where we’ll open 10 branches in five years, and in Lancaster by 2003 or 2004. We have 25 new branches that are in one state of development or another. We’re gaining new customers and investors.”

In addition, Groff said his Ephrata bank isn't small, just adolescent and growing.

“We’re approaching $500 million in total assets,” he said.